Utilizing benchmarks is the easiest way to determine how well your hospitality company stacks up against others in your industry. Understanding and knowing current benchmarks is a great way to measure the success of your company against industry standards. They give you a way to identify areas in which you are excelling, as well as where extra attention and resources may be needed.
To stay competitive amidst rising food costs, employee turnover rates, changing consumer habits and other market factors, it’s essential to understand how your metrics stack up against industry standards. Click the button below to download the benchmarks regarding three major subgroups in the hospitality industry:
As a general rule, local sales tax should be charged to customers on all sales made in a local taxing area. The local tax applies to anyone who is from outside the city or county and picks up items in the local area for business or personal use. This applies even if the customer takes the items outside of the local tax area.
Do not charge local sales tax on sales of taxable items when:
You receive a completed Form ST3 – Certificate of Exemption.
You ship or deliver the items to your customer outside the local area.
Note: You must collect local sales tax based on where your customer receives the taxable product or service. The tax should be calculated and charged to the customer based on the final destination of the delivered items.
If a restaurant (outside the locality) buys and picks up materials in a city with a local tax, the local tax rule applies to this sale. To figure the tax, combine the state tax rate and the local rates. Apply the combined rate to the taxable sales price and round to the nearest full cent. Report local taxes when filing your Minnesota Sales and Use Tax. Note – the figures are reported separately from state taxes.
The Minnesota Department of Revenue website has a sales tax calculator to determine the state and local sales and use tax rate to apply to taxable purchases. To find the appropriate sales tax rate for a particular jurisdiction, enter a valid address and city, or enter the full nine digit zip code. The nine digit zip code method is the most accurate. The sales tax calculator DOES NOT include any special local taxes, such as lodging taxes or liquor.
is at or near a record low. Hospitality business owners are looking for new
tools to attract and retain a robust workforce. One tool often left unutilized is
an employer sponsored qualified retirement plan under section 401(k), or 401(k)
plan. These plans allow employees who participate in the plan to save for their
future retirement and reduce or defer the amount of income tax owed each year.
If utilized properly, a 401(k) plan may be a great tool to build a strong team.
Offering an opportunity to participate in these plans may be valuable to many
employees, but there are a few pitfalls that should be avoided. If you are
thinking of starting a plan, here are a few things to consider.
a benefit plan means being accountable for it. 401(k) plans are sponsored by a
business and have named plan trustees. As a Trustee, you have fiduciary duties
representing the interest of all plan participants and must keep their best
interests in mind. These duties include:
investments and fees
payroll withholding in a timely manner
employees are vesting in the plan correctly
wages eligible for withholding are being calculated correctly
as the plan trustee and sponsor, you have the obligation to ensure the plan is
operating in accordance with plan documents provided to your employees. Failing
to perform these duties correctly may lead to required corrections to employees
and penalties from the Department of Labor (DOL). If left unidentified or
uncorrected, these costs may add up quickly. Working with a good third party
administrator will save you time and help maintain your plan processes.
you elect to sponsor a 401(k), or if you already sponsor a plan, ensure your
employees are aware of it. If your employees are not aware of the benefits, it
is not really benefitting anyone. Also, be conscious that you are required to
communicate with all eligible employees whether they have elected to
participate or not. This is why adopting the correct plan is important.
in the hospitality industry is extremely high (73.8% in the hotel/motel
industry per the DOL and statistics), so you likely do not want to waste time
enrolling employees who are going to leave within a few months. The good news
is the plan may restrict eligibility to employees who have worked for the
business for a specific period of time and have worked a minimum number of
hours within that time period. You may also set different enrollment criteria
for salary employees, such as management and other hourly employees. 401(k)
plans offer great flexibility regarding plan eligibility, but it is important
to establish a suitable plan structure and follow the plan documents.
participation throughout the business is important. While you can be selective
with the criteria for eligibility for plan participation, these plans are designed
to benefit all employees so restricting eligibility to owners or top management
is not generally permitted. Part of the trustee’s responsibility is to ensure
the plan is not ‘top-heavy,’ or have too large of share of plan assets held by
owners and key employees. There are several ways to prevent this, but the
easiest and most beneficial is to get as many employees to participate. When
starting a plan, there are options for automatic enrollment, in which employees
are enrolled automatically unless they specifically elect not to, which
typically increases participation.
There are two
components regarding cost to a business in a 401(k) plan:
The first is the cost of administration. Starting and administering a 401(k) does cost money, but it may not be as much as many business owners believe. Costs of plan administration are actually decreasing due to competition by plan custodians (investment brokers) who benefit from these investments under management. The incentive of more investments and therefore more investment fees means more competitive plan administration expenses. Administrative costs are not also required to be incurred by the business. Administrative costs for a plan may be paid by the plan sponsor, the plan participants or split between the two parties. More participants in the plan will also spread any costs paid by the plan over a larger group and therefore should be less cost per participant. These decisions will be include in plan documents and once again it is imperative the plan be administered in accordance with plan documents. Plan administration costs may increase when your plan reaches a certain size because the DOL may require an annual audit. If your plan has more than 100 employees eligible to participate (including employees eligible but not participating), speak to your plan administrator or other professional about ensuring your plan is in compliance with DOL regulations.
The second component of cost relates to employer contributions to employee accounts. Generally, there is no requirement to make contributions to employee’s accounts. However, providing this additional incentive is a great way to get more employees to participate in the plan. Many employers incentivize employee participation in the form of a matching contribution. Matching contributions may be dollar for dollar or a fraction of employee contributions and capped at a maximum rate. Employers may also choose a standard contribution to eligible employees regardless of participation, or contribute based on years of experience and a variety of other ways. This benefit is typically paid to employee’s working over 1,000 during a year and employed at year end, and only paid to employees who have been employed longer than one year. Owners do not pay for short-term employment. They only contribute to employees who add value to the business. Employer contributions are subject to the plan’s stated vesting schedule, or stated term of employment before employees are eligible to keep employer contributions. Vesting is typically earned over a range of three to six years of service to the company. While employer contributions are not a required expense, it may be considered the largest benefit to having a plan, and many employers also feel good about helping their employees to save for retirement. In addition vesting incentivizes employees to stay with the company. Both administrative costs and employer contribution costs can be managed by utilizing the significant flexibility allowed under the 401(k) Plan structure.
a retirement plan in a benefits package may help attract and retain talented
employees and there is tremendous flexibility within plan regulations to allow
businesses to implement and afford a plan that works for both the business and
its employees. The underlying theme to successfully administering a retirement
plan oversight by custodians, good communication with eligible employees and
participants, and most of all, administering the plan in accordance with plan
documents. These factors will keep a plan on the right track, keeping the plan
affordable for employers and attractive for employees.
plan compliance is complex, requiring help from trusted professionals who
understand the challenges, rewards and opportunities associated with effective
retirement planning. For more information about the above tips or to learn
about how we can help, please contact a Smith Schafer professional.
Tax Cuts and Jobs Act (TCJA) brought significant changes for many businesses
and individuals, including an overall cut in tax rates. Those in the
hospitality industry have been generally optimistic about the changes,
expecting both an increase in consumer spending and the ability to invest in
people, technology, development and other improvements in their businesses
because of anticipated lower tax liability. Specific provisions in the tax law
affect the hospitality industry more than others. To help hospitality
businesses understand these provisions, we have provided a summary of following
five applicable changes:
Pass-Through Entity Deduction
Bonus Depreciation & Section 179 Expensing
Meals, Entertainment and Fringe Benefits
Interest Deduction Limitations
Excess Business Losses
1. Pass-Through Entity Deduction
Under the tax reform bill, C Corporations benefitted largely from the reduction of the corporate tax rate. The Qualified Business Deductions, i.e. 20% deduction, was passed to create more incentive for pass-through entities. Qualifying pass-through entities will receive a 20% deduction on pass-through income for tax years beginning after 12/31/17 and expiring in 2025 (with potential caps for some). The deduction potentially benefits hospitality industry business owners with the exception of management companies providing professional service and consulting to businesses.
2. Bonus Depreciation & Section 179 Expensing
Property and equipment play a major role in a hospitality business’ operations. Depreciation and immediate expensing options help businesses utilize property and equipment to reduce taxable income. The tax reform bill helped refine the rules for immediate expensing, referred to as “Bonus Depreciation” and “Section 179 Expensing”.
Under the updated bonus depreciation rules, assets placed in service after September 27, 2017 have no limit to the amount that can be expensed. Prior to the new law, Bonus Depreciation was limited to 50 percent of the cost of new property. Now bonus depreciation can be used on new and used purchases. The new law eliminates the separate categories of qualified leasehold improvement property, qualified restaurant property and retail improvement property and consolidates into one category: qualified improvement property (QIP). This has important consequences to real property placed in service after 12/31/2017 and whether 100% bonus depreciation applies. The ability to expense 100% of eligible property and equipment creates a tax benefit that is likely to encourage more capital spending, potentially enabling more remodels in the hospitality industry. The amount allowed to be expensed is set be phased out over the next couple of years.
Placed in Service Year
September 27, 2017 – Dec. 31, 2022
section 179 expensing rules eased restrictions that were imposed on the special
deduction. The new law increases the phase-out limits significantly and
includes costs of property placed in service that are incurred to improve a
structure, such as:
ventilation, and air-conditioning property
protection and alarm systems
Special deduction for most types of real estate components, except for those mention above, are still disallowed. Additionally, you still must have taxable income in order to qualify for the Section 179 expensing. The following chart illustrates the maximum section 179 expensing allowed and the beginning deduction phase-out threshold
Maximum Deduction Allowed
Beginning Deduction Phase-out
2017 (old law)
2018 (new law)
$1,000,000 (Plus Inflation)
$2,500,000 (Plus Inflation)
3. Business Meals, Entertainment & Employee Fringe Benefits
The TCJA removes all deductions for entertainment, amusement and recreation, and for membership dues at any club organized for business, pleasure, recreation or another social purpose that are paid or incurred after December 31, 2017. Furthermore, the law limits the deductibility of the costs of food and beverages provided to employees through eating facilities, as well as de minimis food and beverages at the workplace that are employer-provided. Under previous rules, companies could deduct 50% for a variety of expenses, such as client meals, event tickets, charitable event tickets and membership fees. Disallowed entertainment and meal deductions apply even for expenses directly related to the active conduct of a taxpayer’s trade or business. However, there are exceptions to this limitation that allow for certain employee events to be deductible.
the law disallows employer deduction for the cost of providing commuting
transportation to employees, except if the transportation was necessary for the
employee’s safety. The TCJA law also eliminated employer deductions for
qualified employee transportation fringe benefits, such as parking allowances
and mass transit passes. This will cause businesses to decide if they will
continue to pay for nondeductible fringe benefits, or instead pass the tax
burden to their employees by including the amount in taxable wages.
4. Interest Deduction Limitations
The deduction for net interest expenses incurred by a business is now be limited to 30% of its adjusted taxable income – or earnings before interest, taxes, depreciation and amortization. Businesses with average annual gross receipts of $25 million or less are exempt from the limit. This new rule will generally impact highly indebted companies the most.
5. Excess Business Losses
For tax years beginning after December 31, 2017 and before 2026, excess business loss of a taxpayer other than a C corporation is limited. Net business loss of $250,000 (or $500,000 in the case of a joint return) will not be deductible in the current year. However, an excess business loss is treated as part of the taxpayer’s net operating loss and can be carried forward to subsequent years.
The tax reform bill is impacting the hospitality industry in several ways, many of which are positive, including projected higher spending on travel and leisure activities due to a lower corporate tax rate, lower rate for pass-through entities and expanded expensing rules. Yet some changes may have unforeseen consequences. If you have questions about these changes or tax planning strategies in light of the reform, or need assistance with an audit, tax or accounting issue, Smith Schafer can help.
Does your hospitality business allow employees to handle either cash or inventory? If you answered yes, then your business is susceptible to employee theft. The hospitality industry has an enormous amount of cash sales transactions and high industry turnover rates so internal controls are important. Most theft within the hospitality industry is repetitive employee theft of small amounts, which quickly add up to a significant impact on the bottom line. The best way to prevent employees, who may be tempted to line their pockets, is to reduce temptation with highly visible prevention tactics and proactive internal controls.
There are several areas susceptible to fraudulent activities in the hospitality industry, but the three highest risk areas are:
To mitigate the risk of fraud and
theft in these areas, it is important to have procedures in place to prevent
your hospitality business from suffering negative impacts from employee
are procedures and controls all hospitality businesses should have in place
to prevent fraudulent activities:
Cash is one of the easiest things for dishonest employees to steal from a business. Tips to prevent this from occurring:
Ensure there is segregation of duties between who is counting at night and who is opening in the morning and making the morning deposit.
Start each shift with a predetermined server and till floats.
Reconcile the daily deposit reports with what is actually deposited at the bank. Compare this to the point of sale reports.
Limit the amount of people allowed to sign checks and only allow payments to approved vendors and for approved invoices.
Prepare monthly bank reconciliations and verify all deposits and checks are accounted for. The person making the deposits SHOULD NOT be the person preparing the bank reconciliations.
Stealing inventory from a workplace and reselling the inventory to a third party is another common fraudulent activity. Internal controls to prevent inventory theft:
Restrict preparation of food and beverage items until ordered through point of sale system.
Supervise delivery of inventory and thoroughly check an order to ensure quantities ordered match what is being delivered.
Limit access to food inventory storage areas.
Organize inventory so it is easy to make a quick physical inventory count. Making a physical inventory count monthly and comparing the count to the point of sale inventory reports may help ensure all inventory is present and detect theft.
This form of fraud is intricate and involves someone in the human resources department or a payroll employee with access to generate fictitious employees or vendors and generate fraudulent checks. This is a risk hospitality businesses may see if there is not a proper amount of segregation of duties. Ensure the roles of each employee matches their access to the payroll system and have payroll registers reviewed before processing by an individual who did not prepare the payroll. Have a different person personally hand out paychecks to each employee at least once each quarter.
How Much Do Internal Controls Cost?
Integrating internal controls into your hospitality business’ processes does not need to mean severely increasing the overhead charges. Small tasks can be introduced to limit risk and use minimal time. An accountant may be necessary to play a key advisory role in helping your business design and implement internal controls.
Smith Schafer is a recognized leader in providing accounting
and consulting services to the hospitality
industry since 1971. We have a team of experts, focused on working
with the hospitality industry, and committed to helping our clients succeed. If
you have questions about implementing or improving internal controls, Smith
Schafer can help. For additional information, click here to
contact us. We look forward to speaking with
Did you know about half of all small businesses fail due to bookkeeping and accounting errors? A majority of those failures are directly related to poor accounting practices.
Many growing restaurants struggle to create a well-tuned accounting process, especially as certain systems and processes change to support increased activity. While invoicing, accounts payable and payroll often suffer first, improper or delayed accounting also stifles future growth by limiting the necessary data for strategic decisions.
To help restaurant owners better understand the basics of restaurant accounting, we have provided the guide below:
DEFINING RESTAURANT COSTS
For restaurant accounting, all costs can be broken down into four categories:
Cost of goods sold for restaurants are conceptually different from other industries in that the items in this category are mostly food, beverages and ingredients. A good way to think of this is by breaking down each meal or item on the menu and determining what goes into making the specific product. Labor costs, unlike manufacturing companies, should not be included in cost of goods sold.
Labor costs are the wages paid to waitstaff, hosts, kitchen staff or anyone on the payroll. This includes payroll taxes and employee benefits. It is important not to allocate these expenses to costs of goods sold in order to understand what costs go directly into a product.
Occupancy expenses include rent, property taxes and insurance, mortgage and utilities. These are commonly described as fixed costs. Once these expenses have been set by way of contract or agreement, they do not change greatly from year to year. It is important to find value in these expenses when entering into agreement, but they are generally not considered when looking into improving profitability.
Lastly, there are operating expenses. These costs are all the other expenses that do not fit into the above three categories. For example, marketing, professional fees, dining materials and other administrative costs, fall into this group. On the grand scale of restaurant accounting, these expenses will help to support the well-being of the business, but are less of a focus compared to cost of goods sold and labor expenses.
USE OF ACCOUNTING RATIOS
As accountants, we use ratios to help us understand the well-being of a business. The following are a few ratios we use, directly related to the restaurant industry:
Prime costs to salesratio takes into consideration the costs related to the sale of the product. Prime costs are calculated by taking costs of goods sold and adding labor costs. By taking a restaurant’s prime costs divided by total sales, the results is the percent of direct costs that make up total sales. Successful restaurants and bars will typically operate at 65% or lower. By decreasing ingredient costs or optimizing employees, a restaurant may see this percentage decrease.
Cost to sales ratio is similar to the above, but focuses directly on cost of goods sold. The ratio is calculated by taking cost of goods sold (food and drink costs) divided by total sales (food and drink sales). Profitable restaurants and bars fall into the 25% – 35% for this ratio. For businesses whose expenses are heavily reliant on food and drink costs, this is a ratio the management team should continually analyze to increase profitability.
Lastly, here are a couple factors that can be easily calculated based on the size and output of a specific restaurant:
Take the total sales from a certain period and divide by how many seats are in the restaurant or bar. This number can be annualized or figured by day to determine how much each seat brings in for revenue. Would additional seating bring in more revenue? At what point is the restaurant space fully optimized?
Another aspect is the duration of time each customer spends in the establishment. If server or preparation efficiency increases, does the amount of time spent in the restaurant decrease? Is the restaurant able to serve additional customers due to this time decrease?
GENERAL PRACTICES & KEYS TO OPERATION
Accounting software is where most businesses start when opening a restaurant or bar. The most popular software programs on today’s market are QuickBooks, Sage 50, Microsoft Dynamics GP and Wagepoint, but there are many others available. Consult an accountant or bookkeeper to determine the best fit for the business and operations.
Another critical software system for a restaurant is the point of sale (POS) system. A POS system tracks and records orders and completes payment transactions. Common systems used in the restaurant industry include QuickBooks, Square, Aloha and Shopkeep. Similar to accounting software, there are other systems available that are compatible with various programs. The best way to decide is by researching the features each POS system offers. If there are reports or additional features that are not useful, look into buying a more cost effective software. A major benefit of the systems listed above, is there are very basic versions offering add-ons for minimal costs.
An important part of managing a successful restaurant is understandingcash flow. Managing quantity and timing of product orders, paying employees and even keeping track of tips received all fall under the category of cash flow management. Focus on how funds are used to create value and how expenses fall into each cost category. This will help to maintain a healthy cash balance.
Separate activities in the business. For example, track beer sales and liquor sales separately, as well as beer cost and liquor cost. If the ratios explained earlier in this article are applied to each activity, it can be determined if each activity is meeting expectations and what actions can be taken if an activity is not.
As a restaurant owner, it is important to study the industry. Pick different restaurants and bars that have had success. Figure out practices those company’s use and apply them to help improve operations. Try to find services or products the business excels at compared to the industry. With the hospitality industry being highly competitive, it is key to figuring out what separates the business from the rest.
How much money is thrown away every day from food trimmings? Reducing waste makes good business sense. Track and analyze the waste in the restaurant. Conduct inventory reviews in order to compare purchase and quantity of garbage. Change menu in order to minimize quantity of leftovers. Reducing food costs can generate greater revenue.
For a majority of restaurant or bar owners, starting an establishment stems from a talent in cooking or a passion for satisfying customers. Though this may create success to an extent, it is crucial to the well-being of the business to practice proper bookkeeping and accounting methods. If this aspect is outside of an owner or management’s skillset, it is important to work with a professional bookkeeper or accounting provider.
Smith Schafer is a recognized leader in providing accounting and consulting services to the hospitality industrysince 1971. We have a team of experts, focused on working with the hospitality industry, and committed to helping our clients succeed. If you have questions about improving your business model, implementing an accounting practice or tax planning strategies to improve restaurant operations, Smith Schafer can help. For additional information, click here to contact us. We look forward to speaking with you soon.